Cash vs accrual: which basis your books should use

Cash basis records income when money lands and expenses when money leaves. Accrual records income when you earn it and expenses when you owe them. Most small DPC practices file taxes on cash, but your books can show both views, and your CPA decides which one goes on the return.

The difference in one example

In a made-up example, an employer signs up 20 employees and you invoice them $1,500 on December 20. They pay on January 10.

• Cash basis: the $1,500 is January income, because that's when the money arrived.
• Accrual: the $1,500 is December income, because that's when you earned it and billed it.

Same deal, same money, different month. Spread that across a year of invoices, bills and annual memberships, and the two views can tell different stories.

Where it matters in DPC

For a practice where every member pays monthly by card, the two views come out close. The gap grows when you have:

• Employer contracts paid by invoice, often late.
• Annual memberships paid up front. Here's how those show up in your books.
• Bills you owe but haven't paid yet, like a lab invoice or a big supply order.
• Prepaid costs, like a full year of malpractice insurance paid in one month.

What each one is good for

Cash basis is simple and matches your bank account. It's the easiest view for knowing what you can spend. Its weakness is that a big payment in or out makes one month look great and the next look terrible.

Accrual shows what the practice earned and what it cost in each month, no matter when the money moved. It's the better view for decisions about pricing, hiring and whether a month was profitable.

Tax filing is a separate question

Which method you use on your tax return is your CPA's call. Many small practices qualify to file on cash. Changing methods later can take IRS paperwork, so ask your CPA before anyone switches anything.

Your books don't have to match the return's method for every report. A good bookkeeper can keep the books set up so your CPA gets what they need for the return and you get the view that helps you run the practice.

What I'd do this week

• Ask your bookkeeper which basis your monthly P&L is on. Check the report header too, since most software prints it there.
• Ask your CPA which method your return uses.
• If you invoice employers or sell annual memberships, run last month's P&L both ways and compare the totals.

Common questions

Can I switch from cash to accrual?
Your books can show either view at any time. Changing the method on your tax return is different and can need IRS paperwork, so let your CPA handle that.

Which basis does my bank feed use?
A bank feed only records money as it moves, which is cash basis. Invoices, bills and prepaid costs have to be added for an accrual view.

Is accrual only for big practices?
No. Any practice with employer invoices, annual plans or big prepaid costs can get a clearer picture from it, even if taxes are filed on cash.